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Interest rate commentary for 20 June – 24 June 2016

The week was totally dominated by one of the largest single market shocks in the past decade, Brexit. Markets were very quiet in the days leading up to Friday’s poll (UK time) but both equity and currency surged in the hours before the vote commenced as short positions were squeezed out in the belief the ‘Remain’ campaign would win. This positioned markets heavily in favour of the Remain vote so when it became increasingly likely that the Brexit vote would win, markets reversed with great speed. The bellwether sterling shed 12% from its peak of 1.50 US dollars to 1.322 US dollars. While this is significant and a level not seen since the 1980s, it is perhaps worth noting that the currency was at 1.384 US dollars in February this year. The outlook both politically and economically is uncertain although after the initial shock it would be expected that markets will Keep Calm and Carry On (sorry).

Close Week
Cash Rate%   1.75
90d Bank Bill%   1.95  -0.05    2.01   1.95
Aust 3y Bond%*   1.45  -0.06    1.72    1.41
Aust 10y Bond%*   2.02  -0.07    2.35    1.97
Aust 20y  Bond%*   2.58  -0.08    2.89    2.58
US 2y Bond%   0.63  -0.06    0.77    0.63
US 10y Bond%   1.56  -0.05    1.74    1.56
US 30y Bond%   2.41  -0.01    2.55    2.41
iTraxx 136.2    3.70  136.2   125.0
$1AUD/US¢  74.79    0.84   76.50   73.06
* Implied yields from Sept 2016 futures

Australian government bonds of course were the beneficiary as investors fled to safe haven assets. Australian bonds fell below 2.00% again before closing at 2.01% which was down 25 bps on the day. US 10 year Treasury bonds fell 31bps to 1.42% before closing at 1.58% (down 16bps). German 10 year bonds made a new record closing low of -0.05%. Risk premiums on Australian corporate bonds rose and would be expected to keep rising if volatility in financial markets does not dissipate. Uncertainty is likely to lead to deferred investment decisions and company profits would suffer should growth falter. Credit default insurance shot sharply higher. Against this background the US Fed will find it very difficult to raise US rates in July as previously thought by markets.

Cash rate forecasts are now suggesting another rate cut to 1.50% by August 2016 is all but factored in and term deposit yields of 3.30% for 6 months now have greater appeal.

Hybrid securities had an initial sell-off after which investors began buying them for their high yields. The movements were not uniform however and investors should review the YieldReport tables to see which hybrids were favoured.

Fixed interest securities should be a safe haven asset in every portfolio as you expect them to perform when other markets are cratering. While yields are very low by historical standards, return of capital can sometimes be just as important as return on capital.

We hope you enjoy reading this week’s YieldReport.


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May 2016 monthly interest rate commentary

Bonds performed very well in May with all key categories returning positive numbers. Bond yields fell over the month, driven by the first negative quarterly CPI number in 7 years (March quarter -0.2%) that, in turn, led to the Reserve Bank of Australia cutting the official cash rate to a another record low of 1.75%. Bond yields surged lower driving positive bond returns for the month. The biggest beneficiary was the government bond index which has a larger amount of longer-dated securities (duration) in it. The government bond index returned 1.37% for the month, followed closely by the semi-government index with 1.28% and the composite bond index with 1.26%. The corporate bond index, with typically lower duration, returned 1.05% while the Floating Rate Note Index……Click here to read more

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